Real Returns on Residential Real Estate

As we've noted in this space (here and here, for example), with a few local/short-term exceptions, residential real estate has been a pretty lousy investment.

So we were pleased to see Brett Arends weigh in on this question in this morning's Wall Street Journal. An excerpt:

Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent -- in other words, the right to live in your home -- was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.

Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home.

Indeed. And as Arends notes, the bust ain't over. Consider the key elements of this morning's report on sales of existing homes:

• Sales rose 2.9% from March, but declined 3.5% from April, 2008.
• Median prices fell 15% from a year ago, but readers should handle these numbers with care. See this item from Calculated Risk for more on the math of medians and means.
• Fully 45% of sales were distressed properties.
• Foreclosure filings rose to a new record, 32% higher than a year ago.
• Supply picked up, with inventories rising to 10.2 months from 9.6 in March.
• Inventories of homes priced at or above $750,000 have reached a 40-month supply.

So... no. Across a full market cycle and in most places, residential real estate hasn't been a very good investment. When prices are rising, the magic of leverage makes it seem like the best investment around. But as millions of "homeowners" and "investors" have learned, the flip side of leverage is pretty ugly, especially in a relatively illiquid asset class like real estate.

None of this means buying residential real estate is unwise. It just means that the benefits--a place to live, forced saving through an amortizing mortgage, the potential for at least some real appreciation--should be kept in proper perspective.

Sources

Brett Arends, "Is Your Home a Good Investment?" Wall Street Journal, May 27, 2009

Bob Willis, "Home Resales Rise on Drop in Prices," Bloomberg, May 27, 2009

Comments

[Tony Petroski:]

Articles like this one are the flip side of the sales of books like "How You can become Rich Buying Real Estate." The appearance of such books probably signal a top, and the ongoing (and seemingly endless) appearance of articles like the one above (Suggested title: "How You can Go Broke Buying Real Estate") probably signal a bottom.

May 27 03:13 PM

[Radardoc:]

Two comments:

First,
"Foreclosure filings rose to a new record, 32% higher than a year ago."

The only metric I shy away from. It is artificially high due to coming out of govt imposed forclosure "holidays."

Second,
"None of this means buying residential real estate is unwise. It just means that the benefits--a place to live, forced saving through an amortizing mortgage, the potential for at least some real appreciation--should be kept in proper perspective."

In my opinion, probably the best, most concise summary of the market at this time.

May 27 04:07 PM

[nobull:]

Im in the northeast and Im looking to buy but I must say prices still have ways to go down before it becomes attractive. There is plenty of inventory on the market. And while prcies be lower than the peak, theyre still unrealistic. There's the hope from sellers that govt programs will get this market turned around if they just wait it out. Until the govt stops meddling and lets prices find their natural bottom, the market will languish. Ill take my time.

May 28 08:56 AM

[cynewulf:]

When you have a pig this special, you don't eat it all at once.

May 28 09:17 AM